Last week, the caretakers once again increased gas prices in an attempt to appease the International Monetary Fund (IMF). Previous adjustments were apparently insufficient to address the issue, leading to this latest rise.
Energy prices have been on the rise since last year, particularly in the last three months, primarily due to increases in domestic gas tariffs. This surge was triggered by the import of expensive gas from partner countries and the ongoing removal of fuel subsidies, which had previously kept rates lower compared to neighboring countries but higher than global trends.
The immediate repercussions since December 2023 have been significant. Gas bills have soared nearly fivefold, from approximately Rs. 8,000 in November to over Rs. 40,000 for non-protected consumers. Fuel prices are expected to climb even higher next month to tackle gas circular debt and meet the fresh requirements for acquiring another IMF program in April. As Pakistan aims for a larger $10 billion program compared to the expiring $3 billion bailout, higher loan amounts translate to increased energy tariffs.
The latest price hike varies among different consumer segments. Residential users will face up to a 70 percent increase, with low-income households expected to bear the brunt of the impact. Commercial consumers will see no change, while bulk consumers, including industries and fertilizer manufacturers, will experience higher rates.
Concerns have arisen regarding the competitiveness of the industrial sector, which is already burdened with cross-subsidies. The focus of the increase is primarily on captive users, aiming to eliminate the apparent discrimination between exporting and non-exporting sectors.
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To address pricing disparities within the fertilizer manufacturing sector, the government is now advocating for uniform pricing, particularly for urea production. However, doubts linger regarding oversight on fertilizer companies’ pricing practices, with concerns that some may disproportionately benefit from the price hikes, resulting in windfall profits.
Companies like Engro Fertilizer and Fauji Fertilizer Bin Qasim are expected to benefit from the new gas rate hike, while market indicators such as earnings and farmer turnover are anticipated to take significant hits. Additionally, uncertainties loom over potential price adjustments based on gas supply costs, particularly for companies reliant on gas supply from Mari Petroleum.
The government must improve the pricing mechanism to prevent certain companies from exploiting the situation and ensure the IMF-led objective of curbing circular debt is achieved.
There are calls for stricter regulation of fertilizer companies’ profit margins, with suggestions to establish a fixed gross margin regime to ensure that lower gas prices’ benefits are passed on to farmers, thereby mitigating the inflationary impact on food prices.
The secondary impact of the gas rate hike also includes a significant increase in fertilizer prices, which could undermine efforts to reduce inflation.
The government’s energy tariff adjustments have both positive and negative consequences. The timing, coupled with inadequate assistance for the most vulnerable, is harsh and rapid, catching many Pakistanis off guard. With the caretaker government transitioning out and making way for a new federal government, fuel and energy rates are rising at an alarming pace, with no clear plan in place to safeguard society’s most vulnerable members.